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August 3, 2015

In a previous post this blog addressed the Supreme Court’s 2011 ruling in Stern v. Marshall.[1] In Stern, the Court held that Article III of the Constitution limited bankruptcy courts from entering final orders on certain state law counterclaims despite such claims being designated as “core” proceedings by statute (now known as Stern Claims).

The Supreme Court left questions of great interest unanswered in Stern, but two emerged quickly: 1) can a bankruptcy court treat a “core” Stern Claim by the same procedures as “non-core” (disputes not significantly related to a bankruptcy case) under 28 U.S.C. Section 157, and thereby carry the dispute through proposed findings of fact and conclusions of law to forward to the district court; and 2) can a bankruptcy court enter a final judgment on Stern Claims with the parties’ consent?

In Exec. Benefits Ins. Agency v. Arkinson,[2] the Supreme Court addressed the availability of non-core procedures for Stern Claims. While the Ninth Circuit had described Stern as creating a statutory gap where Stern Claims fell somewhere in between a bankruptcy court’s jurisdiction over core and non-core proceedings, the Supreme Court disagreed. Rather it held that Stern Claims do not create a statutory gap and that these claims can proceed in bankruptcy court as non-core claims. As such, the bankruptcy court must treat the Stern Claim as a “non-core” matter and issue proposed findings of fact and conclusions of law for review by the district court.

In what would be in some ways a preview of Supreme Court treatment of jurisdiction by consent, the Eleventh Circuit stepped forward in In re Fisher Island Invs., Inc.[3] and took up the issue. Fisher, as discussed in a previous post, held bankruptcy court jurisdiction to exist where the parties “expressly consented to the bankruptcy court’s final adjudication” of the matters at issue in the case.

The Supreme Court took up the issue of consent in Wellness Int’l Network Ltd. v. Sharif.[4] In Wellness, the creditor, Wellness, sought a finding in the debtor’s Chapter 7 bankruptcy that a state court judgment against the debtor was non-dischargeable and that certain assets contained in a trust were included as part of the bankruptcy estate. Creditor obtained its remedy by default and the debtor appealed. On appeal, the parties completed all briefing prior to the debtor’s attempt to object to jurisdiction under Stern. Among its rulings, the Seventh Circuit held that a party cannot waive a constitutional objection based on Stern.[5]

The Supreme Court granted certiorari on the issues of consent to jurisdiction. The Court upheld the constitutionality of a bankruptcy court final judgment on a Stern Claim by reason of the parties’ consent, and that such consent may arise either impliedly or expressly.[6]

While, as discussed above, Stern progeny has developed on the Stern Claim issues of utilizing non-core procedures and establishing bankruptcy court jurisdiction by consent, bankruptcy law participants still await the clarity that would come from more direction of the Supreme Court on the scope of, limits of, and safe harbors of a Stern Claim—or what the bankruptcy courts could efficiently do in the case of a non-consenting party to a Stern Claim.

However, as for such efficiencies as may be available currently under Stern and its progeny, the United States bankruptcy courts and committees have moved forward.

In response to Stern, and before Wellness, the Bankruptcy Rules Committee proposed amendments that would require parties to indicate whether they consent to bankruptcy court jurisdiction. However, when the Court granted certiorari in Wellness, the Rules Committee withdrew the proposed amendments.[7] In light of the eventual holding in Wellness, it would not be surprising if the Rules Committee were to re-introduce a version of these proposed amendments. Further, some individual bankruptcy courts have amended their local rules to require a statement regarding the parties’ consent to final adjudication of the claims. (Southern District of Indiana in 2012 (B-7008-01, 7012-1, 9027-1 and 9033-1); Local Bankruptcy Rules for the United States Bankruptcy Court for the Central District of California (effective 1/1/15) (Rule 7008-1(mandating that statements required by FRBP 7008(a) and 7012(b) be “plainly stated in the first numbered paragraph of the document.”)).)

Beyond procedural changes, since Wellness, Courts appear to have moved forward on the development of holdings finding implied consent where: 1) the parties failed to object to the entry of an order;[8] 2) the parties identified the matter as a core matter on which the bankruptcy court could enter final judgment;[9] 3) a party requested the bankruptcy court issue an order where the party never filed a motion to withdraw the reference;[10] 4) a scheduling order required parties to file objection to entry of final order and failure to do so amounted to consent (“[t]he failure to comply with the terms of this paragraph shall be deemed to constitute consent to the entry of final orders by the Bankruptcy Judge”);[11] and 5) the parties have made a preliminary statement expressly consenting to the bankruptcy court entering a final order on the subject claims.[12]

So, while bankruptcy law participants look forward to further clarity from the Supreme Court regarding the scope, limits, and safe harbors of Stern Claims, we do see headway on the use of non-core procedures for use in Stern Claims where one or more parties do not consent, as well as developing rules and jurisprudence enhancing the clarity of express and implied consent.

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